Warren Enterprises had the following events during Year 1: The business issued $23,000 of common stock to its stockholders.The business purchased land for $15,000 cash.Services were provided to customers for $19,000 cash.Services were provided to customers for $8,000 on account.The company borrowed $19,000 from the bank.Operating expenses of $15,000 were incurred and paid in cash.Salary expense of $1,100 was accrued.A dividend of $7,000 was paid to the stockholders of Warren Enterprises. Assuming the company began operations during Year 1, What is the amount of retained earnings as of December 31, Year 1?
A) $3,900
B) $3,700
C) $13,900
D) $27,000

Question

Quizplus · Accepted Answer

Retained earnings are calculated by taking the beginning retained earnings (which is $0 since the company started operations in Year 1), adding net income, and subtracting dividends paid. Net income is calculated by adding revenue (cash services $19,000 + services on account $8,000 = $27,000) and subtracting expenses (operating expenses $15,000 + salary expense $1,100 = $16,100). Thus, net income is $27,000 - $16,100 = $10,900. Subtracting dividends ($7,000) from net income ($10,900) gives us retained earnings of $3,900.

Warren Enterprises Had the Following Events During Year 1: the Business